No comfort at home for AirAsia as overseas units drag

November 21, 2013 12:06 AM

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KUALA LUMPUR (Reuters) - Malaysia's AirAsia Bhd (AIRA.KL) will take up to two years to realise a profit from its Indonesia and Philippine units, income that would help prop up eroding margins as Asia's largest budget carrier wages a price war at home.

AirAsia, which has dominated budget air travel in Asia with explosive growth, is now struggling to boost earnings in its biggest market, Malaysia, where rivals such as national carrier Malaysian Airline System (MAS) (MASM.KL) and Malindo Airways are slashing fares.

The Kuala Lumpur-based firm posted a 77.5 percent slump in third quarter profits to 35.8 million ringgit from a year ago, as forex losses on borrowings and a strategy of offering low fares to retain market share ate into margins.

Competition is also affecting AirAsia's Indonesia and Philippines units, which have yet to reverse combined losses that have deepened to 210.5 million ringgit in the third quarter. Its Thailand unit has completely reversed losses since the first quarter of 2012 and did well in the third quarter of this year as more passenger traffic offset rising fuel costs.

"The future of AirAsia Group is the associates, where one day they will be larger than AirAsia Berhad in terms of profits and aircraft, as the growth potential in their countries will be phenomenal," AirAsia said in a statement to announce their financial results on Wednesday.

But analysts say that could take awhile. Ahmad Maghfur Usman, an analyst at RHB Research Institute, said AirAsia Philippines - the smallest in terms of passenger volume, would only reverse the negative equity after one year.

Maybank analyst Mohshin Aziz forecast the Indonesian unit, AirAsia's third-largest by passenger volume, will take another four quarters to contribute to overall profits as it struggles to fend off competition from Lion Air and Garuda (GIAA.JK).

AirAsia's profit margins are expected to fall to 10.4 percent in 2013 from 15.7 percent a year earlier, Thomson Reuters data shows. Within the next two years, however, margins are seen rising to around 15 percent.

AirAsia is also spending big to set up a unit in India with Tata Group, where taxes make jet fuel costs among the world's most expensive.

Earlier this month, AirAsia Group CEO and co-founder, Tony Fernandes, said a cost-cutting drive had helped deliver "good success" in the third quarter which will carry on into the fourth.

AirAsia's net profit has fallen for the first two quarters by 40 percent and 62 percent year-on-year, largely due to the price war in Malaysia. Fernandes and co-founder Kamarudin Meranun returned to the frontline at home this month to take more control of the airline after a year in Jakarta spearheading regional operations.

"I've seen some routes go down to 'doomsday fares', especially Kuala Lumpur to Sabah, Sarawak and to Singapore. Even AirAsia can't make money this way," said Maybank analyst Mohshin.

AirAsia said it cut fares from Malaysia in the third quarter by 12 percent, while analysts estimated its largest rival MAS had slashed fares by 20 percent over the same period.

The rush to book tickets for year-end holidays in Malaysia would see fares go down slightly in the last quarter of this year from 2012, AirAsia said.

MAS, which this week reported a third-quarter net loss from a profit a year ago, said its yields and prices were pressured by competition.

As of Wednesday's close, AirAsia's shares were down 9.8 percent so far this year compared to a 2.7 percent drop for MAS shares.

Analysts, however, said AirAsia's low-cost structure meant it was better placed than Malaysian Airlines to absorb lower ticket prices.

"There is competition from Malaysian Airlines but I think AirAsia's valuation takes this into account," said Arnaud Bouchet, Singapore-based analyst at BNP Paribas.

"Every attempt by an airline to offer very low ticket prices is usually a very bad end," he added, referring to Malaysian Airlines. "I don't think that's sustainable."